Academic

When Microfinance Meets the Micro-Need: Harvard Students Cut Out the Financial Aid Middleman

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

The media loves to give us recession stories these days of once-fortunate elites having to cut coupons, cancel private kindergarten deposits, and explore "staycations," and one sub-genre of those stories includes high school students who have gotten into wonderful colleges with awe-ful price tags wondering how to make do.  On the flip side of these stories are stories of alumni feeling disengaged from their alma maters.  So, leave it to some bright Harvard kids to find a niche here.

Borrowing ideas from microfinance, peer-to-peer, crowd-financing models (Kiva.org) and old-fashioned "adopt this child for 59 cents a day" appeals, Unithrive allows Harvard students to request interest-free loans of up to $2,000 from alumni.  NYT story here.  (Actually, one founder is related to the President of Kiva.)  Now, while this approach is laudable on many levels as anyone who has depended on student aid remembers the horrible bureaucracy of the student loan process, this program is probably not sending people to Harvard (or allowing people to stay at Harvard) who couldn't get there otherwise.  I'm pretty sure that $2000 is not what's keeping most people out of Harvard College.  Instead, as the article shows, Unithrive is paying for a pre-med student's MCAT prep course and a dance student's trip to Japan, "the birthplace of karate."  Even the most high-minded use of the highest award is for a full-scholarship student to be able to forego the usual part-time job required to cover all living expenses, which the financial aid office figures into awards.  After all, as founder (along with Nimay Mehta and Tanuj Parikh) Joshua Kushner reminds us, "the most special thing about college is not just what you do in class, but what you do out of class."  (And apparently, waiting tables will not teach you any thing about life like hanging out with your dorm friends will.)

But, truthfully, there are a lot of expenses for college and graduate school that financial aid budgets don't pick up, and these interest-free loans are a much better option than credit card financing, which is how a lot of true necessities (interview suits and travel, test prep) are paid for by students.  And of course, there are people who fall through the cracks of financial aid.  For example, students who are accepted into Harvard whose parents make less than $60,000 are guaranteed free tuition, but what about the scores of people whose families make more than that?  I would assume it takes a lot more income than that to pay Harvard tuition out-of-pocket.  So here's a way for the middle group to bridge some of the gaps.  And really, how can you knock interest-free?

And alumni may like it.  Instead of giving a $100 gift to your annual fund, which goes into some general budget, you can choose from the website a student who reminds you of your self 20 years ago.  You'll probably get a thank-you note and maybe a mentor opportunity.  Not many of us can afford to fund an endowed scholarship at our alma mater with targeted criteria designed to reach people we think are deserving, but here you can do it on a much smaller scale.

Unithrive is one month old.  So, it's too soon to tell much about it -- who gets loans, who repays them.  Will it "democratize" lending?  I'm not sure what that means here.  A different segment of folks will be lenders than are the usual lenders, and the borrowers may be a different segment as well.  Will the borrowers be more meritorious than most student borrowers?  They may be better credit risks -- alumni lenders may look for better academic qualifications, better signals for eventual success.  But I would be interested in other aspects of which loan orphan gets picked off the Unithrive site.  Are they attractive?  Are they from particular socio-economic backgrounds?  It would be a great dataset to mine in a few years.

Oh, and question to our tax geeks:  is the interest that is not charged tax-deductible to the donor?  Is it income to the recipient?

Full post as published by Conglomerate on June 15, 2009 (boomark / email).